Full Year 2024 Mesoblast Ltd Earnings Call

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Speaker Change: Here on the company's behalf as Michael Cerner, their CFO and Bowen diehl, their CEO and with that I'll hand, it over to bone to begin thank you.

Operator: Here on the company's behalf is Michael Sarner, their CFO, and Bowen Deel, their CEO. With that, I'll hand it over to Bowen to begin.

Speaker Change: Thank you very much for share by being here today.

Bowen Deel: Thank you.

Bowen Deel: Thank you very much. Appreciate it by being here today.

Speaker Change: I'm going to give you a little introduction to capital southwest and then we'll open the floor up for questions.

Bowen Deel: I'm going to give you an introduction to Capital Southwest, and then we'll open the floor up for questions. I'm Bowen Deel, CEO, Capital Southwest, and Michael Sarner, CFO, as he said. Josh Weinstein, our CIO, had to hit the road for a new deal we're looking at.

Speaker Change: Bowen Diehl, CEO capital southwest and Michael <unk>, our CFO as he said, Josh Weinstein, our CIO head to.

Speaker Change: I hit the road for a new deal we're looking at so he couldn't join us, but I put them up here for your notes.

Bowen Deel: So he couldn't join us, but I put him up here for your notes. Alright, so Capital Southwest, you know, we're a business development company. We were founded back in 1961, pretty old BDC. We took it over in 2015 and re-launched it as a credit lender.

Speaker Change: Alright, So capital southwest you know, we're a business development company, we were founded back in 1961 pretty old.

Speaker Change: BDC, we took it over in 2015 and relaunched it is a credit Linda I'm happy to dig into that history. If anyone has an interest later, but that's.

Bowen Deel: I'm happy to dig into that history if anyone has an interest later, but that's the summary. We trade on the NASDAQ under C.S.W.C. We also have a retail bond issue that trades as well, C.S.W.C. Z. We're an internally managed BDC, so for those who understand BDC, that's a, you know, our shareholders own the manager and the managed assets, and so we have the same shares that our shareholders own. We don't have a management contract where we're earning management fees. We have the same exact shares. 32 employees, we're based in Delft, Texas, and we have about 1.5 billion of assets as of the end of June, and we also have an SBIC subsidiary, which we can get into detail if people are interested on how that works, but that's a very valuable source of capital for us.

Speaker Change: That's the summary.

Speaker Change: We trade on the NASDAQ under CFW C. We also have a retail bond issue that trades as well she Swc Z.

Speaker Change: We are an internally managed BDC so for those who understand BDC. That's a you know our shareholders own the manager and the managed assets and so we have the same shares that our shareholders own. We don't have a management contract or any management fees and we had the same same exact shares.

Speaker Change: 32 employees were all based in Dallas, Texas, and we have about $1 5 billion of assets as of the end of June.

And we also have a <unk>.

Speaker Change: Spic's subsidiary, which we can get into detail. If people are interested in on how that works, but that's a very valuable source of capital for US we have almost fully funded the first license and we applied for our second SBA see license and that's going very well and then lastly, we have a we're investment grade rated by both Moody's and Fitch.

Bowen Deel: We've almost fully funded the first license, and we applied for our second SBIC license, and that's going very well. And then lastly, we have a; we're investment grade rated by both Moody's and Fitch. So Capital Southwest is a lower-middle-market senior-first lean lender, and 95% of what we do is we are lending to private equity funds into their transactions, where private equity fund is buying partial or majority, but less than majority, or less than 100% interest in a family-owned or founder-owned business. So the world we play in is one where, you know, with the aging population, you've got business owners, 55 to 75 years old, looking to partially sell their business, but stay involved in role equity over and continue to stay involved in the business, and then use capital institutional capital to institutional expertise to institutional eyes in their business, and institutional capital to then buy three or four of their competitors, let's say.

Speaker Change: So capital southwest is a lower middle market senior first lien lender.

Speaker Change: 95% of what we do is we are lending to private equity funds into their transactions, where a private equity fund is buying a partial or a majority of it but but less than majority.

Speaker Change: Our net less than 100% interest and a family owned our founder owned business.

So the war we play in is one where with the aging population you've got business owners 55 to 75 years old looking to partially sell their business, but stay involved in roll equity over and continue to stay involved in the business and then use capital and institutional capital to institutional expertise to institutionalize and their business and institutional capital to them.

Speaker Change: By three or four of their competitors, let's say so.

Speaker Change: And so we're basically the debt the senior debt behind that transaction and then we most of the time, we'll write an equity check on a minority basis alongside that private equity firm. So that's our world that we live in.

Bowen Deel: So, and so we're basically the debt, the senior debt behind that transaction, and then we most of the time we'll write an equity check on a minority basis alongside that private equity firm.

Speaker Change: Typically when we enter a deal where that company is a three to maybe as much as $25 million in EBITDA.

Bowen Deel: So that's our world that we live in. Typically, when we enter a deal where that company is at three to maybe as much as $25 million in EBITDA, most of the deals are, say, three to 10, 12 when we get in, in EBITDA when we get in the transaction, and then ultimately, as they may add on acquisitions and they grow organically, that EBITDA obviously grows from there. Typically, we're lending, you know, say two and a half to four and a half times cash flow, and 25 percent, maybe as much as 50 percent of the value of the acquisition.

Speaker Change: Most of the deals are phase III 10, 12, when we get in of EBITDA, when we get into the transaction and then ultimately as they made to add on acquisitions and they grow organically EBITDA, obviously grows from there.

Speaker Change: Where we're lending say two and a half to four five times cash flow and 25% maybe as much as 50% of the value of the of the acquisition. So we think we think of that as loan to value.

Bowen Deel: So we think of that as loan to value, but that's generally where we play, and again, on a first lien, top of the capital stack. We commit, can commit up to 50 million, and we generally have hold sizes from as small as 5 million as much as mid 30s, as far as hold size debt basis. Most of our sponsor deals, we also do non-sponsored deals, but the vast majority, 95% of our deals are backed by private equity firms, and I think in this market, that's actually super important, certainly from a sleep and night perspective. Floating rate, first lean debt, that's kind of the market.

Speaker Change: Generally where we play and again on our first lien top of the capital stack basis.

Speaker Change: We commit can commit up to $50 million and we <unk>.

Speaker Change: Generally have hold sizes from as small as $5 million as much as mid thirties as far as hold size that basis.

Speaker Change: Most of them are sponsored deals. We also do non sponsored deals, but the vast majority 95% of our deals are backed by private equity firms and I think in this market, that's actually super important and certainly from a sleep at night perspective.

Speaker Change: Floating rate first lien debt, that's the kind of the market.

Speaker Change: And as I said, we invest co investments alongside the P/e firms.

Bowen Deel: And as I said, we invest co-investments alongside the PE firms. So, this slide basically lays out kind of the three reasons we do what we do. I mean, we think the lower-middle markets is an attractive market. These are found-run businesses. They're typically growing in a nice clip. There's a lot of low-hanging fruit typically on what you can do with a relatively somewhat casually managed business and move it into a professional business with strong KPIs, institutional systems, processes, smartly expanded Salesforce, Salesforce, et cetera. A lot of upside opportunity in those relatively unseasoned businesses, although a lot of them have been around a long time.

Speaker Change: So this slide basically lays out kind of the three reasons, we do what we do I mean, we think the lower middle market is an attractive market. These are founder owned businesses. They are typically growing at a nice clip. There's a lot of low hanging fruit typically on what you can do with a relatively somewhat casually managed business and move it into a pro.

Speaker Change: <unk> business with strong Kpis institutional systems.

Speaker Change: Office, He's smartly expanded salesforce sales forces et cetera, a lot of upside opportunity in those relatively unseasoned businesses, although a lot of them have been around a long time, there's been many maintenance, perhaps managed for the founders checkbook or families checkbook as opposed to real cash flow growth.

Bowen Deel: They've just been making, perhaps managed for the founder's checkbook or family's checkbook, as opposed to real cash flow growth. You know, we like the fact that, you know, in our market, all our deals have covenants. I get asked that question a lot. All our deals have covenants. Covenants are super important to our business. It's a personal lender. You know, we can better control the outcomes with a debt. Vast majority of the deals go fine, but you know, there's always a handful, small handful of deals that struggle. And we're the top of the capital stack. So everyone below us in the capital stack needs to keep us happy.

Speaker Change: We like the fact that in our market all our deals have covenants I get asked that question a lot all our deals have covenants covenants are super important to our business.

Speaker Change: As a first lien lender.

Speaker Change: Can better control the outcomes with a debt.

Speaker Change: The vast majority of the deals go fine, but you know there's always a handful a small handful of deals that struggle and where the top of the capital stack. So everyone below us in the capital stack needs to keep us happy and so we have a lot more optionality to maybe convert a piece of the debt to equity to one part of the business.

Bowen Deel: And so, we have a lot more optionality to maybe convert a piece of the debt to equity to own part of the business. You know, that kind of thing. And so, as far as a plan A, is always to get the money back from the company, but you have to have a plan B. And so, your plan B is much more solid than when you're a first lean lender.

Speaker Change: That kind of thing and so as far as the plan a is always to get the money back from the company, but you have to have a plan b and so your plan B is much more solid and when you are a first lien lender and so that's a critical strategic point of why we do what we do.

Bowen Deel: And so that's a critical strategic point of why we do what we do. And then from a balance sheet financing perspective, it wouldn't surprise you that a portfolio of first lean, top of the stack assets is more attractive to debt capital providers and can only to some extent equity capital providers. And so it's a much more efficient asset base to then finance on our balance sheet.

And then from a balance sheet financing perspective, it wouldn't be it wouldn't surprise you that a portfolio of first lien top of the stack assets is more attractive to debt capital providers.

Speaker Change: To some extent equity capital providers.

Speaker Change: And so it's a much more efficient asset base to then finance on our balance sheet.

Speaker Change: So since there's an investor conference. The summary, I'd like you all to take away from today is why would you why would you consider our stock in.

Bowen Deel: So, since this investor conference, you know, the summary I'd like you all to take away from today is, you know, why would you buy it? Why would you consider our stock and, you know, whether you buy it tomorrow or a year from now, why is this even relevant to our conversation? Again, asset portfolio, top of the stack, 90% of our assets are in private equity-backed businesses with your funded institutions that could provide support capital. Certainly strategic and operational guidance, but then also capital if needed, which hopefully supports our credit book. We've been paranoid about our recession for the last 10 years.

Speaker Change: By Tomorrow or a year from now why is this even relevant to our conversation again asset portfolio top of the stack, 90% of our assets are in private equity backed businesses with your funded institutions that could provide support capital.

Speaker Change: Certainly strategic and operational guidance, but then also capital if needed.

Speaker Change: Ultimately supports our credit book.

Speaker Change: We've been paranoid about a recession for the last 10 years.

Speaker Change: Whether one came about or not it wasn't that wasn't as important as we need every loan in our portfolio to be underwritten to be able to handle a recession.

Bowen Deel: Whether one came or about or not, that wasn't as important as we need every loan or portfolio to be underwritten to be able to handle the recession. So that's been fundamental to the DNA of everything we do in our firm that we set in place 10 years ago. We're an internally managed BBC. So, as I said, we own the exact same shares, our share or so. So we double assets and we destroy the stock price that didn't double our management piece. Just destroyed my personal balance. So it's personal. And so that's a big deal to how we run the firm.

Speaker Change: So this has been fundamental to the DNA of everything we do in our firm that we set in place 10 years ago.

Speaker Change: Internally managed Bdcs, who said we own the exact same shares our shareholder zone. So we double assets and we destroy the stock price that.

Speaker Change: That didn't double our management fees that's just.

Speaker Change: Destroyed my personal balance sheet, so it's personal and so that's a big deal to how we run the firm.

Speaker Change: And then we have a flexible capital structure Mike.

Bowen Deel: And then we have a flexible capital structure. You know, Michael's designed it from day one, very methodical with multiple capital sources, 50% of our capital base, our debt capital is covenant light, unsecured bonds. It's the number of reasons why that's important from a flexibility perspective. So, as we've grown our book on this slide, you can see, I mean, it's, you know, 98% of our assets are first lien. Our average hold size over time has, you know, head canals are assets have grown. Our average hold size hasn't really grown all that much. It's grown some, but so that the result of that is our granularity, as we call it. The number of loans, average hold size of our loan, is about 1% of our assets.

Speaker Change: Michael is designed it from from day, one very methodical with multiple capital sources, 50% of our capital base, our debt capital is covenant light.

Speaker Change: Unsecured bonds.

Speaker Change: Number reasons, why that's important from a flexibility perspective.

Speaker Change: So as we've grown our book on this slide you can say Gee I mean, it's $8, 98% of our assets are first lien.

Speaker Change: Average hold size over time has.

Speaker Change: Head count as our assets have grown our average hold size hasnt really grown all that much it's growing some but aren't so that the result of that is our granularity as we call it but the number of loans average hold size of our loan is about 1% of our assets. That's a good metric from a risk management perspective, and an important one for us.

Bowen Deel: That's a good metric from our risk management perspective, and an important one for us. On the operating, on operating expenses, we keep, you know, we basically as internally managed vehicle, we get fixed cost benefit as assets grow. And essentially what that means is we can grow our overhead. We grow our overhead slower than we grow our assets. So we're clearly, I think we've more than doubled our overhead over the last 10, 8, 10 years, but we've grown our assets more. So you get real fixed cost benefit from that as shareholders. And so, you know, operating leverage, which is basically operating cost divided by assets, was started out close to 5% when we took over, and it's, you know, because we have less assets, less overhead.

Speaker Change: On the operating on operating expenses, we keep we basically is internally managed vehicle, we get fixed cost benefit as assets grow and essentially what that means is we can grow our overhead we draw red slower than we grow our assets. So we are clearly I think we've more than doubled our overhead over the last 10 years to 10 years, but we've grown our assets.

Speaker Change: More so you get real fixed cost benefit from that as shareholders and so on.

Speaker Change: Operating leverage which is basically operating cost divided by assets was started out close to 5%. When we took over and it's because we have less assets less overhead today, it's one 8% so from a kind of.

Bowen Deel: Today, it's 1.8%. So I look at it somewhat of rhymes with a load on a mutual fund. So it's less load going out to manage the assets, and so we can maybe take less risk at the asset base, but also generate higher ROE at the end of the day for our shareholders. And why that's also important is if you look at our NII ROE, so our earnings are in the top three in the BDC space in terms of return. And as a lot to do with the fact that we're basically spending less on operating expenses versus the 2.9% to 1.8% compared to 2.9% for the market.

Speaker Change: I look at it as somewhat of rides with a load on our mutual funds. So there's less load going out to manage the assets and so we can.

Speaker Change: Maybe you take less risk at the asset base, but also generate higher ROE at the end of the day for our shareholders and why that's also important if you look at our NII ROE. So our earnings are in the top three in the BDC space in terms of return and has a lot to do with the fact that were basically spending less on operating expenses versus the two 9%.

Speaker Change: Eight compared to two 9% from the market. So it's.

Speaker Change: But the point is a good one we are able to take less risk and actually produce more and our leverage today is <unk> 75 to one on a regulatory basis, which is also in the bottom three.

Bowen Deel: So it's, you know, both points are good. One. We are able to take less risk and actually produce more. And our leverage today is 0.75 to 1 on a regulatory basis, which is also in the bottom three of the BDC portfolio. Yeah, so nutshell, we're creating higher earnings with less financial leverage.

Speaker Change: The BDC portfolio.

Speaker Change: Yes.

Speaker Change: Nutshell, we're creating higher earnings with less financial leverage.

Speaker Change: That's a business model that's working so.

Bowen Deel: That's a business model that's working. So we're pretty proud of that.

Speaker Change: We're pretty proud of that alright, so the results of that over time, as we generated steady and growing dividends or shareholders. No surprise are living on those dividends.

Bowen Deel: All right, so the result of that over time is, you know, we've generated steady and growing dividends. Our shareholders know the surprise are living on those dividends. That's where we're a yield play for people. We pay three different kinds of dividends, ones of regular dividend, which is basically rep matched with our recurring NII or net investment income. We have a supplemental dividend program where it's excess earnings or distributions over time of our UTI balance. And then if we have a large gain in any one juncture, which we've got to handful of those seasoning in the portfolio, if one or more of those would sell, then that would be a potentially opportunity to pay a special dividend.

Speaker Change: We're a yield play for people.

We paid three different kinds of dividends once our regular dividend, which is basically rent matched with our recurring NII or net investment income we have a supplemental dividend program, where it's excess earnings.

Speaker Change: Or distributions over time of our UTI balance.

Speaker Change: And then if we have a large gain in any one juncture, which we've got a handful of those seasoning in the portfolio, if one or more of those would sell then that would be potentially opportunity to pay a special dividend.

Speaker Change: Ultimately our board is very biased towards distributing capital to our shareholders. Because we think that's what our shareholders want and we have to date, we have 50 cents of Utah.

Bowen Deel: Ultimately, our board is very biased towards distributing capital to our shareholders because we think that's what our shareholders want. And we have to date, we have 50 cents of UTI or under tribute tax income that beds that supplemental program. We have also, we have these exits that goes into that bucket. And that allows us either to do a special dividend or to dribble out a supplemental dividend that can be paid out in perpetuity.

Speaker Change: UTI, our undistributed taxable income that bad state supplemental program. We have also we have these exits that goes into that bucket and thats allows us either to do a special dividend or to dribble out a supplemental dividend that can be paid out in perpetuity.

Speaker Change: And then the ultimate scorecard is value creation over time. So you look at our total value creation over time, we've created created significant value for our shareholders.

Bowen Deel: and then the ultimate school card is value creation over time. So, you know, we'll get a total value creation over time; we've created a significant value for our shareholders. Portfolio is, you know, highly first lean. You can see the wheel chart on the right, you know, that's very diversified by design across industry groups. That's the, you know, must be DECs, but show grass like that, but that's kind of, we exist to create yield at limited risk. Ultimately, needs to be a diversified portfolio. So, our portfolio, we've got it on the right here, 117 portfolio companies, about 1.5 billion assets with an average whole size of 12.7 million.

Speaker Change: Portfolio is highly first lien you can see the wheel chart on the right, it's very diversified by design across industry groups.

Speaker Change: Most bdcs would show a graph like that but that's kind of we exist to create yield at limited risk ultimately needs to be a diversified portfolio.

Speaker Change: So our portfolio we've got on the right here 117 portfolio company is about $1 5 billion in assets with an average hold size of $12 7 million.

Speaker Change: And that's 89% first lien our average yield across our debt investments was 13, 3%.

Bowen Deel: And that's 89% first lean; our average yield across our debt investments is 13.3%. And our average EBITDA is, you know, less than 20 million, 19.7 million, and an average leverage across the portfolio of about 3.8 times cash low. And that equates to about an average across the book, about 41% loan to value. So, to give you an idea where our credit book sits with respect to the underlying value of those portfolio companies.

Speaker Change: And our average EBITDA is less than 20 million $19 7 million.

Speaker Change: Average leverage across the portfolio of about three eight times cash flow.

Speaker Change: And that Coates to about on average across the book about 41% loan to value. So to give an idea of where our credit book sits with respect to the underlying value of those portfolio companies.

Just from some of the questions. We've heard today. So our average hold size you can see collectively with the debt and equity is still sub $15 million. We see deals that are really in the $20 million to $50 million size that were splitting with other partners. So when we look at our growth going forward without having to change what we do in the sandbox we plan we can.

Bowen Deel: And just some of the questions we've heard today. So, our average whole size you can see collectively with the debt inequities. So, you know, some 15 million; we see deals that are really in the 20 to $50 million size that we're splitting with other partners.

Bowen Deel: So, when we look at our growth going forward without having to change what we do in the sandbox we plan, we can continue to increase the size of our hold. You know, we're below 1% on; we mentioned earlier on granularity. So, we're very conservative, but we do have that ability to continue to grow that whole size, which helps grow the balance sheet without taking on additional risk.

<unk> increased the size of our holding were below 1% on.

You mentioned earlier on granularity. So we're very concerned derivative, but we do have that ability to continue to grow that hold size, which helps grow the balance sheet without taking on additional risk.

Speaker Change: You were talking about our capitalization strategy. So it's obviously important to a BDC. We started the venture in 2015, the company had $285 million in cash and no debt.

Michael Sarner: You want to talk about our capitalization strategy? Yeah, so it's obviously important to a BDC. You know, when we started the adventure in 2015, the company had 285 million in cash and no debt, no analysts, and no banks to speak of. So, you know, we started off with a credit facility with ING and grew that one credit facility from 75 million up to 460 million today and spread across 10 different banks. Subsequent to that, we were able to tap the baby bond market, which was, you know, a retail product, which was about 75 million dollars.

Speaker Change: Analysts and no.

Speaker Change: <unk> to speak up so we started off with a credit facility with IHG and grew that one credit facility from $75 million up to 460 million today and spend across 10 different banks.

Speaker Change: Subsequent to that we are able to tap the baby bond market, which was a retail product.

Speaker Change: That was about $75 million.

Speaker Change: And from there we were able to branch out into doing institutional bonds, we actually the first lower middle market small cap BDC to be able to raise an institutional bond. So we were sort of.

Michael Sarner: And from there, we were able to branch out into doing institutional bonds. We actually, the first lower middle market, you know, small cap BDC to be able to raise an institutional bond. So, we were sort of, you know, our track record able to net us some success on the debt markets. Since then, we've done several institutional bond deals, two of which they're outstanding today. You know, our balance sheet cash is 33 million. Our total drive-out are available to invest today is 485 million. So, pretty significant. And we, you know, you compare that to our unfunded commitments, which is about 150 million dollars.

Speaker Change: Our track record of net of some success on that.

Speaker Change: The debt markets. Since then we've done several institutional bond deals two of which their outstanding today.

Speaker Change: Our balance sheet cash is $33 million or total dry powder available to invest today is $485 million so pretty significant.

Speaker Change: Compare that to our.

Speaker Change: Unfunded commitments, which is about $150 million, we've got a lot of available capital to deploy in pretty much any market and what makes that even more powerful is the fact that we're only lap of basically said <unk> 75 to one the regulatory limit is two to one but.

Michael Sarner: We've got a lot of available capital to deploy in pretty much any market. What makes that even more powerful is the fact that we're only allowed to set 0.75 to 1. The regulatory limit is 2 to 1. But we would tell you that, you know, we're more conservative. That, you know, 1 to 1 is probably the, you know, as high as we like to go. But we still have cushion to lever up a bit, depending on the market. But we have the cash flow, obviously, and the entry powder to continue to do.

Speaker Change: But we would tell you that we're more conservative.

Speaker Change: One to one is probably as high as we like to go but we still have cushion.

Speaker Change: To lever up a bit depending on the market when we have the cash flow, obviously and dry powder to continue to do so.

Speaker Change: So I think the next point on this slide is just that we do have we have two maturities coming up in 2026. That's the nearest ones were already sort of working on the take out for those for those bonds.

Michael Sarner: So, I think the next point on this slide is just that, you know, we do have two maturities coming up in 2026. That's the nearest ones. We're already sort of working on the takeout for those bonds. And then from there, we don't have maturities for quite a while, so we're actively managing any cliff maturities and making certain where we have; we do that well in advance of one of those maturities come.

Speaker Change: And then from there we don't have maturities for quite a while so we're actively managing any cliff maturities and making certain we haven't we do that well in advance of whenever those maturities come.

Speaker Change: So that's kind of where we wanted to give you an overview of the company were happy to go through maybe maybe the latest quarter.

Bowen Deel: So, that's kind of, we want to give an overview of the company. We're happy to go through maybe the latest quarter. You know, we've produced 69 cents per share last quarter. And if you recall from this graph back here, you know, we paid out, you know, 64 cents total, supplemental and regular. Obviously, with yields being high, and so for being high, earnings are high. We share some of that over excess earnings with our shareholders. So, we've produced 69 cents per share. And that includes, you know, a 58 cents per share regular dividend, which we view as sacrosanct; that doesn't ever go down.

Speaker Change: We produced 69 cents per share last quarter, and if you recall from this graph back here.

Speaker Change: We paid out 64 cents total sub mental and regular obviously with yields and so for being high earnings are high we share some of that excess earnings with our shareholders.

Speaker Change:

Speaker Change: So we produced six nine cents per share.

Speaker Change: And that includes a.

Speaker Change: <unk> 58 per share regular dividend, which we view that as sacrosanct that doesn't ever go down. So we set that at a rate that we think under any kind of future scenario rates coming down included.

Bowen Deel: So, we set that at a rate that we think, under any kind of future scenario, rates coming down included. Recession included that that dividend should be covered. So, that's a regular dividend on our supplemental dividend. That's six cents extra. And that's a function of UTI balance on our balance sheet as well as just excess earnings wherever, so for stand, at the moment. And then our best and portfolio, one and a half billion, you know, we originated, you know, $108 million in commitments last quarter. Our net asset value of 16 cents per $16.60 a share. We raised almost $40 million of ATM equity last quarter.

Speaker Change: Recession included that that dividend should be covered so that's that's a regular dividend on our supplemental dividend that is the <unk> Xtra and thats a function of UTI balance on our balance sheet as well as as well as just excess earnings wherever show firsthand at the moment.

Speaker Change: And then our investment portfolio of one 5 billion, we originated $108 million in commitments last quarter, our net asset value of 16 cents per <unk> 16.

Speaker Change: $16.60 a share we raised almost $40 million of ATM equity last quarter. So it's a very active program we have a resist.

Bowen Deel: So, that's a very active program we have where we just sell equity into the general trading volume. We're trading at, you know, almost one and a half times book. So, that's very accretive to our shareholders to do that. And so, we do that on a just-in-time basis to basically look at our originations for the during the quarter, our pre-payments during the quarter and where we want leverage to be at the end of the quarter, and then we tell the traders how much equity you kind of bleed into the market. And if you compare us to other BDCs, so up to, you know, 60 BDCs, there's probably only about five to ten that can continually trade above book.

Speaker Change: Sell equity into the general trading volume were trading at almost one five times book, So that's very accretive to our shareholders to do that and so we do that on a just in time basis to to basically look at our originations for the during the quarter, our prepayments during the quarter and where we want leverage to be at the end of the quarter and then we tell the traders how much equity you kind of blue.

Speaker Change: <unk> into the market.

Speaker Change: And if you compare us to other BDC, so up to 60 Bdcs, there's probably only about five to 10 that can continually trade above book and so therefore, they have access to an ATM program the rest of them.

Bowen Deel: And so, therefore, they have access to an ATM program. The rest of them, you know, they, when they trade above book, they'll issue a large equity raise because they don't know when they're going to be above their next. So, that's dilutive, obviously. So, for us, to both point, from an efficiency standpoint, we're raising capital very, like on a day and day out basis in utilizing that to invest. So, we don't have a use for capital; we're not raising money, and the discount is quite small relative to a fully marketed, you know, 8 to 10 percent deal.

Speaker Change: When they trade above book they'll issue a large equity raise because they don't know when theyre going to be above their next so that's dilutive obviously, but for us the Tibetans point from an efficiency standpoint, we're raising capital vary on a day in day out basis and utilizing that to invest so we don't have a use for capital, we're not raising money and the discount is.

Speaker Change: Small relative to a fully marketed 8% to 10% deal.

Speaker Change: So I'll pause there any questions you'd like me that we wanted to make sure. We cover ground you guys want to cover yes.

Operator: So, I'll pause there. Any questions? You like me that we want to make sure we cover ground, do you guys want to cover? Yes.

Speaker Change: Yes.

Bowen Deel: Would you explain your S-B-I-C and S-B-A adventures will produce between the two when you're doing a new S-B-I-C because you're almost maxed out? Yeah, so let me give you a macro, and I want Michael to talk about how he kind of manages that. So, the S-B-I-C program, you see the S-B-A, it's a government-private-private-public partnership and basically, if you get a license, which is a proctology exam, if you get a license, then you basically could access that program. So, basically, we draw down on the S-B-A debenture and then may issue S-B-I-C debentures, which are guaranteed by the government.

Speaker Change: Adventures.

Speaker Change: He is the cleanup.

Speaker Change: No.

Speaker Change: Yeah. So let me give you a macro I don't Michael to talk about how you kind of manage to that so the FDIC program you see the SBA.

Speaker Change: And the government private partner private public partner Chip and basically if you get a license.

Speaker Change: Which is a proctology exam, if you get a license then you basically can access that program and so basically they we drawdown on the SBA debenture and then they issue FDIC debentures, which are guaranteed by the government. So there are lower cost.

Speaker Change: Two people that will invest in spic's eligible assets until they have to be small businesses, which is defined term, which is a large part of what we do so it fits right into what we do.

Michael Sarner: So, they're lower costs. to people that will invest in SBIC eligible assets, and so that have to be small businesses which is a defined term, which is a large part of what we do, so it fits right into what we do. And then we draw down on that, and we make a draw. Those are 10-year notes, which, as you can imagine, it's not what we can raise cost-efficient elsewhere in the capital market, so we'll be ready. So you want to tell me the rest. Because it's floating in the way that every time you make a draw, it's floating, and then it gets pooled to a fixed rate.

Speaker Change: And then as we draw down on that and we make a draw those are 10 year notes, which as you can imagine it's not where we can raise cost efficient elsewhere in the capital markets and it'll be ready.

Speaker Change: So if you want to tell them what to us because of it.

Speaker Change: It's floating in the way that every time you make a draw it's floating and then it gets pool to a fixed rate so for the for all of the $175 million in the first license. It's about $4 two 5% is about our blended cost.

Michael Sarner: So for our 175 million on the first license, it's about 4.25%. Is about our blended cost. As Boen said, we've got an application in, and we expect to have approval for the second license. You'd expect with rates coming down that that next 175 million might be something south of that rate. Because in the last 10 years, the pooling amounts have been the highest they've been for a very long time. You've got one to three outstanding there. Correct. What's the SBA 22 million? So that is the full approval by the SBA for our SBA license is 175.

Speaker Change: As Bowen said, we've got a application and we expect to have approval for for the second license you would expect with rates coming down that that next $175 million might be something south.

Speaker Change: Of that right because this is in the last 10 years. This the pooling amounts had been the highest they've been in.

For a very long time.

Speaker Change: Three outstanding there.

Speaker Change: Correct.

Speaker Change: SBA 22 million.

Speaker Change: So that so that is the full approval by the SBA for our Spic's license is 175. So we've drawn 153, and we still have 22 million that had been approved by the SBA, but we haven't actually drawn it because you have to have the assets in <unk>.

Michael Sarner: So we've drawn 153, and we still have 22 million that have been approved by the SBA, but we haven't actually drawn it because you have to have the assets identified before you're able to receive the draw. What's your expected timing on the second license? So I think the government is kind of difficult to pretend, but I would say it's probably by the end of this year, for sure. No, we've had our application in, and we've had our org meeting, which tells me they pulled us out of the stack. So that's good news to me, but they all told me to find the timing.

Speaker Change: Identified before you're able to receive the draw.

Speaker Change: Timing understandably.

Speaker Change: So I think we are.

Speaker Change: The government is kind of difficult to kind of.

Speaker Change: But I would say, it's probably by the end of this year for sure.

Speaker Change: Now we've had we've had.

Speaker Change: We took our application in and we've had our Org meeting, which tells me they pull us out of the stack. So that's good news to me, but they ultimately define the timing. They did say 24 months and our SP I see our assets and our Spic's have done very well so they're looking at a track record that stellar so that's great. So we'll see yes.

Michael Sarner: They did say two to four months. And our SBIC, our assets and our SBIC have done very well. So they're looking at a track record that's stellar, so that's great. So we'll see.

Speaker Change: Repeat the question, yes, so I'm going to repeat the question. So he wants to.

Bowen Deel: Yeah, so I'm going to repeat the question. So he wants a very good question. Why would a private equity firm use our capital as opposed to a bank's capital? Our capital is more expensive. So why would they use our capital versus a bank capital? So there's a number of reasons. Other than just reliability, you get to closing for banks, first non-banks. That can be a factor sometimes, and sometimes not so much, right? So there's a period of time when the regional bank noise was going on. That was a big deal. Like banks were very, I mean, a lot of banks don't want to lend to smaller companies without boundary guarantees and various things, right?

Speaker Change: Good question why would a private equity firm use our capital as opposed to a bank's capital our capital is more expensive. So why would they use our capital versus a bank capital. So theres a number of reasons.

Speaker Change: Other than just reliability to get to closing for banks versus nonbanks that can be a factor, sometimes and sometimes not so much right. So there's a period of time when the regional bank noise was going on and that was a big deal like banks, we're very well. It makes a lot of banks don't want to lend to smaller companies without founder guarantees and various things right, but but there are handful of goodwill and so.

Bowen Deel: But there are a handful of it will. And so when the regional bank noise was happening, they were completely out of the market, and now they're kind of back. So they compete with us. But the competing structure is, I'm going to give you an example and illustrate it. So let's say a business is an e-mought for a private equity firm for eight times cash flow. And they want to lever it three times cash flow. A bank option, the bank might lever it. They might be willing to go one and a half days. Let's just say two times cash flow, and they get a mezzanine partner to put in junior capital for another turn to get to the 3%.

Speaker Change: When the regional bank noise was happening they were completely out of the market and now they're kind of back okay. So they compete with us and so but the competing structure is what I'm going to give you. An example of kind of illustrate it so let's say our businesses and even bought four by private equity firm for eight times cash flow right.

Speaker Change: They want to lever it three times cash flow, our bank option bank might lever it.

Speaker Change: They might be willing to go one and a half years, let's just say two times cash flow and they get a mezzanine partner to put in junior capital for another turn to get to the 3%, okay or they come to someone like us and we lend them three times cash flow and one strip so why would they do that well.

Bowen Deel: Or they come to someone like us, and we lend them three times cash flow in one strip. So why would they do that? Well, it's one investment committee, not two. And it's not only the initial closing, but they want to do four or five acquisitions. And they don't want to deal with sub debt and senior banks. And the preference would be to not have to have the food fight between senior and sub-debt lenders. Now, sub debt is a very robust market. It's not one we're in. So a lot of private equity firms will use sub debt.

Speaker Change: It's one investment committee not too and it's not all additional closing, but they want to do four or five acquisitions and they don't want to deal with sub debt and senior banks and the preference would be to not have to have the food fight between senior and sub debt lenders.

Speaker Change: So that's a very robust market is not one where in a lot of a lot of private equity firms will use sub debt, but that's the alternative so theres a lot of firms that want the one decision. The one investment committee. They also liked the fact that we're right at the same lender who has all the debt is also writing an equity check alongside them on a minority basis.

Bowen Deel: But that's the alternative. So there's a lot of firms that want the one decision, the one investment committee. They also like the fact that we're right. The same lender who has all the debt is also writing an equity check alongside them on a minority basis. So you look at our portfolio, we're 90% credit and 10% or 9%. 91% credit, 9% equity, and that equity is small equity investments across 69 portfolio companies. So that's part of our business. And one of the reasons we like the lower market, because we can do that. So they like that alignment of interest.

Speaker Change: So you'll get our portfolio, where 90% credit and 10% or 9%, 91% credit 9% equity in that equities small equity investments across 69 portfolio companies right. So that's part of our business and one of the reasons, we like the lower middle market, because we can do that.

Speaker Change: They liked that alignment of interest.

Speaker Change: And then there's other things like banks have scheduled amortization, they're very rigid they want to be paid scheduled amortization down different banks, 80% in other loan paid off scheduled in four years or whatever it is right to get to a certain duration. So we don't have scheduled amortization most of the time, we have cashflow sweeps.

Bowen Deel: and then there's other things like banks have scheduled amortization; they're very rigid. they want to be paid scheduled amortization down different banks, 80% of their loan paid off scheduled in four years, or whatever it is, to get to a certain duration. So we don't have scheduled amortization most of the time; we have cashflow sweeps. So at the end of the year, they sweep our debt down by the access cashflow. So access cashflow is good down, the debt obligation goes down. Right, so they like that flexibility. And then, you know, a lot of these private equity firms, it's a big relationship business as well.

Speaker Change: So at the end of the year, they sweep our debt down by the excess cash flow.

Speaker Change: Excess cash flows go down their debt obligation goes down right. So they like that flexibility.

Speaker Change: And then a lot of these private equity firms.

Speaker Change: It's a big relationship business as well. So these private equity firms there are some that sit at their desk in a financially engineer leveraged buyouts.

Bowen Deel: So these private equity firms, there are some that sit at their desk and they financially engineer leverage vials. And then there's others that buy founder own businesses that they want to do ten things to the business that are operationally intensive, and they look at a five year IRR model, and it's the generation of IRR is way more influenced by the operational changes and not by the 50 or 100 basis points or even 150 basis points different in the capital cost. And so, and they want a lender to come in that has flexibility and will invest alongside them on a minority basis, align the interest, and if they pay 150 basis points more in pricing, it doesn't matter to them.

Speaker Change: And then there's others that buy founder owned businesses and they want to do turn things to the business that are operationally intensive and they look at our five year IRR model and it's.

The generation of IRR is way more influenced by the operational changes and not by the 50 or 100 basis points or even 250 basis points different than the capital cost and so and they want a lender to come in that has flexibility in it.

Speaker Change: And we will invest alongside them.

Speaker Change: Minority basis align the interests and if they pay 150 basis points more in pricing.

Speaker Change: It doesn't matter to them so.

Speaker Change: So franchise building and building that.

Bowen Deel: So, so franchise building and building that source. And in fact, we've done deals with 105, 104 private equity firms in 10 years, and we have 75 of them in the book today. I mean, that to me, that's our franchise. We're working the aging population system and the buy out and sale and buy out and sale world and financing that. And so, those relationships are what generate our deal flow. And the relationship is a track record of working with PE firms in a way that's constructive for what they're trying to accomplish. And I mean, all of those lines when things do go sideways, I think the rigidity that we kind of just touched on, I mean, it comes to play with the banks relative to where we will work with them.

Speaker Change: Source and in fact, we've done deals with 100 and 504 private equity firms in 10 years, and we have 75 of them in the book today.

Speaker Change: That frame that to me that's our franchise, we're working the aging population system in a buyout in sale and buyout and sale world and financing that and so those relationships are what generate our deal flow and the relationship has a track record of working with PE firms in a way that is constructive for what they're trying to accomplish so and.

Along those lines when things do go sideways I think the rigidity that we kind of just touched on I mean, it comes to play with the banks relative to where we will work with them and a good example, even as the company is doing well and then as a cashless sweep they may come to us and say look you know they've already delever just based on their performance you guys.

Bowen Deel: You know, a good example, even if the company is doing well and there's a cash flow sweep, they may come to us and say, you know, they've already delivered just based on their performance. You guys, you want to just pass on that sweep, we'll use the cash to continue to grow. We can make that decision. I think the banks are far less flexible to do something like that. You know, so one more thing on that is the first lean lender; we have a lot of control in the capital structure if things start moving around. And so, our optionality and the things we can do to, we're not a subdeck guy that's getting ready to get swamped by the bank, you know, that's above us.

Speaker Change: I wanted to just pass on that sleep when we use the cash to continue to grow we can make that decision I think the banks are far less flexible to do something like that.

Speaker Change: I'll say one more thing on that is a first lien lender.

Speaker Change: We have a lot of control in the capital structure of things start moving around and so our optionality and the things we can do to we're not a sub debt guy who's getting ready to get swamped by the bank.

Speaker Change: And so when you do that you have to sprout fangs and you have to do all kinds of stuff to defend yourself as a first lien lender.

Bowen Deel: And so, when you do that, you have to sprout banks, and you have to do all kinds of stuff to defend yourself. As a first lean lender, we can do a lot of things that defend our capital for our shareholders, which is goal number one, but also do it in a flexible, constructive, and creative way so that the manager team on the ground managing the company can do and meet the challenges that they're facing as a company. And that's a big deal in our world to be able to have that flexibility to kind of manage a credit book.

Speaker Change: We can do a lot of things to defend our capital for our shareholders, which is goal number one but also do it in a flexible constructive and creative way so that the management team on the ground managing a company can do.

Speaker Change: Meet the challenges they are facing as a company that's a big deal in our world to be able to have that flexibility to kind of manage the credit book at the same time, you're managing or a set of relationships and generating shareholder returns overtime. So that's the theory behind it.

Bowen Deel: At the same time, you're managing net losses for the past five four years so far from $1,000 up to $14,000. If it's a trend in the industry, but it's just kind of kind of me getting tougher at that there are patterns. Yeah, you're doing my unrealized, unrealized appreciation for folks like we mark our book. to the market every quarter. And you're talking about the value of those loans coming down. Yeah, so we have 117 portfolio companies, and we have four that are struggling, meaningfully struggling, where we're having conversations around converting a piece of our debt to equity, that type of thing.

Oh.

Speaker Change: Great job with it.

Speaker Change: Net losses.

Speaker Change: Alright.

Speaker Change: Got it.

Speaker Change: 700.

Speaker Change: Got it.

Speaker Change: Backwards.

Speaker Change: Thank you.

Speaker Change: Just kind of.

Speaker Change: He's getting.

Speaker Change: Pattern.

Speaker Change: Yes, youre talking about unrealized unrealized depreciation in the portfolio like are we Mark our book.

Speaker Change #100: To market every quarter.

Speaker Change #101: And you were talking about the book value of those loans coming down yes.

Speaker Change #100: Yes.

Speaker Change #100: 117 portfolio companies and we have four that are struggling.

Speaker Change #102: Meaningfully struggling where we're having conversations around converting a piece of our debt to equity that type of thing and so we've taken depreciation on that that's probably the biggest piece.

Bowen Deel: And so we've taken appreciation on that. That's probably the biggest piece. And then we have definitely started to see some signs across the portfolio. I don't know that it's so much of material to the overall book, but it definitely is narrative from management teams in certain industries. It's kind of both business to business, where businesses are taking longer to make the sales decisions or are cutting back costs. The quantum of things they're buying usually in IT services or things like that. And then we have consumer businesses that are doing really well, but we definitely have two or three consumer businesses that are starting to talk about the consumer slowing down.

Speaker Change #102: And then we also we have seen we have definitely started to see.

Speaker Change #102: Some.

Speaker Change #102: Signs across the portfolio I don't I don't know that so much of a material to the overall book, but it but it definitely is narrative for management teams.

Speaker Change #102: In certain industries.

Speaker Change #103: It's kind of both business to business, where businesses are taking longer to make the sales decisions or cutting back costs.

Speaker Change #103: The quantum of things or buying usually and it services or things like that.

Speaker Change #103: And we have consumer businesses are doing really well, but we definitely have a two or three.

Speaker Change #103: Consumer businesses that are starting to talk about the consumer slowing down.

Speaker Change #104: That doesn't really marry up to our problem credits, but I always look at you know people ask me at 117 portfolio companies across the economy. What are you seeing that that can help me think about what I'm hearing on the news right and so we definitely are hearing narrative about slowing down consumer purchases in certain companies and so that rhymes with what you hear on the news.

Bowen Deel: That doesn't really marry up to our problem credits, but I always look at people asking me the 117 portfolio companies across the economy. What are you seeing that can help me think about what I'm hearing on the news, right? And so we definitely are hearing narratives about slowing down consumer purchases in certain companies. And so that rhymes with what you hear on the news, right? And you see in some of the information all of their data out there that suggests the consumer is still strong, but we're starting to see that, and we definitely are seeing, hearing companies mainly IT services, but things like that where clients are either cutting back expenses or delaying purchases.

Speaker Change #105: Right and you're seeing some of the information, although there's data out there that suggests the consumer still strong, but we're starting to see that and we definitely are seeing hearing.

Speaker Change #106: Companies may like mainly it services, but things like that where clients are either cutting back expenses or delaying purchase decisions. We definitely have seen that so that we can say the economy is slowing.

Bowen Deel: We definitely have seen that. So when you say the economy is slowing, maybe still growing, but slowing, I'd say that I would say that the signaling we're seeing across all these manager teams, we're hearing signals that rhyme with that. But some of the portfolio metrics on that, even in the last quarter we had revenue still growing 5%, and even up 1.5% to the 5 quarters, we would tell you that going to kind of hit on it, there's been four, you know, or so portfolio companies that have struggled for the last two years. And we took some sizeable hits to, you know, some of the stuff got converted from debt to equity, and then inevitably some of these companies, the equity got written down.

Speaker Change #106: Maybe still growing but slowing.

Speaker Change #106: I'd say that's.

Speaker Change #106: I would say that the.

Speaker Change #107: Signaling we're seeing across all of these management teams, we're hearing signals that Ryan with that.

Speaker Change #108: But some of the portfolio metrics on it than we did even last quarter. We had revenue is still growing 5% EBIT up one 5% to the five quarters. We would tell you that don't kind of hit on it there's been four or so portfolio companies that have struggled for the last two years and we took some sizable <unk>.

Speaker Change #109: Hits too.

Speaker Change #110: On the sub debt converted from debt to equity and then inevitably some of these companies the equity got written down over the last two years I would probably tell you that.

Bowen Deel: Over the last two years, I would probably tell you that our watch list companies, which are probably 10 or 11 companies, haven't expanded. So it's not like we're seeing across the board depreciation; it's really been kind of lumpy in credits that we've sort of just, you know, trying and trying, but some of them are just not working out. Yeah, as you imagine, we have a watch list; we have a policy internally on how when something makes a watch list, and that's not train wreck, that's just significant challenge, right? So something you may not be worried about: your debt getting paid back, but something's different; something's going on.

Speaker Change #111: Our watch list companies, which are probably 10 or 11 companies Hasnt expanded.

Speaker Change #111: So it's not like we're seeing.

Speaker Change #111: Across the board depreciation has really been kind of lumpy and credits that we sort of just.

Speaker Change #112: Trying and trying but some of them are just not working out as you imagine we have a watch list, we haven't stopped policy internally or how and when somebody makes a watch list and that's not train wreck. That's just significant challenge right. So something you may not be worried about your debt getting paid back, but something's different something's going on so we meet every month and plow through every one of those companies.

Bowen Deel: So we meet every month and plow through every one of those companies, and I said there's maybe 12 on there right now. And we're doing much better, but there, but there's, there are ones that have a big spotlight on them. Yeah.

Speaker Change #113: And is it just maybe 12 on there right now ample and we're doing much better, but there, but they're ones that have a big spotlight on them.

Speaker Change #112: Yep.

Bowen Deel: So what is the impact on NAI? How stories of debt gets paid by that? Do you have any stories of debt? Sure, sure. So I mean, there's a few things on that. So, one, you know, we have one of our, we did a bond last year for seven, seven, seven. That's got a non call to that that comes up in August of next year. So it's probably similar timing. We mean we would expect to raise a large offering, maybe either a convertible bond or, you know, traditional wage, institutional bond. You know, the market we'd expect is going to be somewhere in the five and a half to six percent.

Speaker Change #112: Okay.

Speaker Change #112: Okay.

Speaker Change #112: Got it.

Speaker Change #112: Yep.

Speaker Change #114: Sure sure. So I mean, there's a few things on that so one we have one of our we did a bond last year for 7777, 5%.

Speaker Change #114: That's got a non call too that that comes up in August of next year.

Speaker Change #114: It's probably similar timing, we mean that we would expect to raise a large offering maybe either convertible bond or traditional way institutional bond. The market. We would expect as it can be somewhere in the five 5% to 6% perhaps.

Speaker Change #115: We're considering based on market Intel so we're going to be paying down $70 million plus at 775, and then we're going to be one of those bonds is can be used for in a quarter. So that's probably going to come up with the balance of the two the two is kind of a kind of meet in the middle on the other end, where it would be raising that second spic's license.

Michael Sarner: Perhaps what we're considering will be some market intel. So we're going to be paying down 70 million plus at seven, 75. And then we're going to be one of those bonds is going to be four and a quarter. So that's probably going to come up. But the balance to two, the two is going to kind of meet in the middle. On the other end, we're going to be raising that second SBIC license, which we expect to be in, you know, a sub four percent on the following. Like if you look at 25 and 26 going forward, you'd expect to see that a blended, let's say three and a half or below, cost the capital.

Speaker Change #116: Which we expect to be in a sub 4% on the following if you look at 25 and 26 going forward you would expect to see that our blended let's say three and a half or below cost of capital, we still see the ability to reduce our operating leverage quite frankly, we still have that ability as well. So I think all in all.

Michael Sarner: We still see the ability to reduce our operating leverage, quite frankly. We still have that ability as well. So I think all and all of you. I'd be lying if I told you that we're not going to see our cost of debt go up; that's sure. But I feel like it's going to come up for a period of time, and then it's going to normalize when we go look at the 2026 late October bond. We'd expect that might be less of a drop based on what Sofers' rate cuts coming to bear. Did you imagine that, as you can imagine, there's a lot of strategy on the right side of the home sheet?

Speaker Change #116: Ali.

Speaker Change #117: Yeah, I'd be lying if I told you that we were not going to see our cost of debt go up that sure.

Speaker Change #118: Feel like it's going to come down for a period of time and then it's going to normalize when we go look at the 2026 late October bond, we'd expect that might be.

Speaker Change #117: Yes of a drop.

Speaker Change #117: Just on what Sofer's breakout.

Speaker Change #117: Rate cuts coming to bear.

Speaker Change #119: As you can imagine that as you can imagine there's a lot of strategy on the right side of the balance sheet. Michael is very good at that.

Michael Sarner: Michael's very good at that, so.

Speaker Change #117: Right.

Okay.

Michael Sarner: How about the year end? In fact, 100 points. Yeah, so I mean, we kind of set on call, so I'm not telling you anything different, but so we've set our dividend, you know, so our regular dividend, we just increased it to 58, but we would probably tell you that we see from the 69 cents of NII right now, we expect that to come down into the low 60s. So Sofers can be a material impact, and that's going to be, in the short run, the way we're modeling this out. We do expect to have day one, so the previous question, we're going to be refinancing, you know, four and a quarter up to five and a half, five and three quarters.

Speaker Change #120: Yeah. So I mean, we've kind of said on call. So I'm not telling anything different but so we've set our dividend. So our regular dividend. We just increased it to 58, but we would probably tell you that we see from the 69 cents of NII right now, we expect that to come down into the low sixties. So is there just can be a material impact.

Speaker Change #117: And that's going to be in the short run.

Speaker Change #121: We are modeling this out we do expect to have day. One so the previous question, we're going to be refinancing four in a quarter up to 555 and three quarters. So there will be a hit me that'd be even penny or penny and a half and then we're going to start seeing the ability to refinance. The later that at a later time and our floating rate if you think about it.

Michael Sarner: So there will be a hit, maybe that will be a penny, a penny and a half. And then we're going to start seeing, you know, the ability to refinance the later debt at a later time, and our floating rate, if you think about it, half of our debt stack is floating, and we're paying almost 8%, so it's 250 plus SOFRs, that's going to start coming down as the rate cuts. So that's also going to mitigate the increase in the fixed costs from the bonds that we're probably going to refinance. Yeah, there's several; that's exactly right.

Speaker Change #122: Half of our debt stack is floating and we're paying almost 8%. So it's $2 50, plus sofa, that's going to start coming down as the rate cuts. So that's also going to mitigate the increase in the fixed costs from the bonds that were probably going to refinance.

Speaker Change #121: Yes.

Speaker Change #121: That's exactly right there are several variables as the rate cycle.

Michael Sarner: There's several variables as the rate cycle, the sofa comes down, right. As sofa has gone up really high, the lending industry, all these senior loans are floating rate. Spreads are tightened in our market because people are fat and happy on all the index side, right. And so, and that's been doing this for 25 years is exactly what's happened in past cycles. And so, as the index comes down, the spread will typically widen. So there's a little bit of a, it's not exactly a one-to-one rate goes down 200 basis points, our yields go down 200 basis, really not the way it typically works.

So far it comes down right. So far has gone up really high the lending industry. All of these senior loans are floating rate spreads have tightened in our market.

Speaker Change #123: Because people are fat and happy on all the index side right and so and that's not been doing this for 25 years of exactly what's happened in past cycles and so.

Speaker Change #124: As Ray as the index comes down the spread will typically widen so theres a little bit of it's not exactly a one to one rate goes down 200 basis points. Our yields go down 200 basis is really not the way it typically works and therefore, our yield will go down, but our cost capital go down too.

Michael Sarner: So our yields will go down, but our cost capital will go down too. And, you know, the relative risk premium across the market, or the relative yield alternatives, all yields come down. And so, if everything stays equal, the capital is out west, and yields come down to stock price. So the stock price will go up, right, or at least not go down, you know what I mean. So all these things work together, where you can actually manage that in a way that it's not as one-to-one as, you know what I mean, on an ultimate loan, your investment as a company.

Speaker Change #124: And you know the relative risk premium across the market or the relative <unk>.

Speaker Change #125: Yield alternatives, all yields come down and so if everything stays equal to capital southwest and yields come down the stock price the stock price will go up right or at least not go down.

Speaker Change #126: All these things work together, where you can actually manage that in a way that it's not us.

Speaker Change #126: One to one as.

Speaker Change #126: You know what I mean on ultimately on your investment.

Speaker Change #126: Yeah.

Speaker Change #126: Right.

Speaker Change #126: That's right.

Speaker Change #126: Portfolio is first lien by the way, it's always churning so like so like when.

Michael Sarner: That's right. Correct, correct. Yeah, it's the first lien, by the way; it's always turning. So like, so like, you know, when the company has cash on and pays something down, if you're a sub debt lender, they're paying the debt in the bank down. Now your leverage is going down because you have less bank debt above you. But when you're the first lien lender, all the cash goes to us; it's constantly churning all the time, right? So it's kind of a treadmill in our market, which, but that's personally lending.

Speaker Change #127: When the company has cash flow and pay something down if youre a sub debt lender, they're paying the debt the bank down your leverage has gone down because you have less bank debt above you, but when you're in a first lien lender all the cash goes to us it's constantly churning all the time right. So.

Speaker Change #128: Just kind of a treadmill and harm market, which but that's just that's first lien lending.

Speaker Change #129: I think your equity portfolio.

Bowen Deel: Okay, so I think your equity portfolio ends up to, uh, 20,000 different investments. I think they have up to a 90% percentage of your equity. 9%? I think the equity is a redesign of each quarter or also. But where do you think you're going with that equity? That 20-year-old, faster than an adoption in your loan? Yeah, so it's 69 portfolio companies out of 117 that we have equity in, right? And the vast majority of those, we have a loan next to it. We always invest equity alongside a loan. We don't ever just do one-off equity investments, but some of our equity investments don't have a loan anymore because the company's grown and they refinance this out with a larger lender or even a bank.

Speaker Change #128: Sure.

Speaker Change #128: 9%.

Speaker Change #128: Yes.

Speaker Change #128: Okay.

Speaker Change #128: But.

Speaker Change #128: Okay.

Speaker Change #128: A little more.

Speaker Change #128: Yes.

Speaker Change #130: So it's 69 portfolio companies out of 117 that we have equity right.

Speaker Change #130: And the vast majority of those we have a loan next to it we always invest equity alongside alone we don't ever just do one off equity investments, but some of our equity investments don't have a lot anymore. Because the company has grown and they refinance this out with a larger lender or even a bank and then in the prior year.

Speaker Change #131: We get liquid on that equity when the private equity firm cells of the business and they are a natural instinct to sell the business, but they don't get paid.

Bowen Deel: And then we get liquid on that equity when the private equity and they have a natural instinct to sell the business because they don't get paid. They're carrying until they sell it. So that happens organically. And so the theory on equity in a portfolio like this is the winners make money, and that's what we've seen. The winners make multiples of your capital. So obviously the equity is doing great. Your loans are doing fine. But the small number of loans over here that debt, by definition, is only downside. You get your interest, and if one thing happens, there's no upside on debt.

Speaker Change #131: Gary until they sell it so happens organically.

Speaker Change #132: So the theory on equity in a portfolio like this is the winters make money and that's what we've seen the winters make multiples of your capital right. So obviously the equity is doing great. Your loans doing fine right with a small number of loans over here.

Speaker Change #133: That by definition is only downside right you get your intuition. If one thing happened to date, there is no upside on that right and so the winners.

Speaker Change #133: More than offset the losers on the debt side right because you're seeing lender you end up losing very little money, but sometimes you can lose some and so the equity mix. So that's the theory and what we've seen is the equity upside overtime its more than offset the debt losses, but that's the theory of having if you only add debt then you pay interest but.

Bowen Deel: And so the winners more than offset the losers on the debt side. Because you've seen a lender, you end up losing very little money, but sometimes you can lose some, and so the equity makes. So that's the theory, and then what we've seen is the equity upside over time, there's more than offset the debt losses. But that's the theory of having; if you only add debt, then you pay interest, but the first loan that struggles is just downside. So, as a portfolio, yeah we think that portfolio is pretty exciting. We've got some handful of really interesting upside plays that are outsized.

Speaker Change #134: The first loan that struggles is downside right. So as a portfolio. Yes, we think that portfolio is a pretty exciting we've got some a handful of really interesting upside plays in that their outsized you know what.

Speaker Change #133: Syed.

Speaker Change #135: And as long as we're investing with private equity firms that buy good businesses.

Bowen Deel: And as long as we're investing in private equity firms that buy good businesses as a whole and generate upside, that's going to do it. So we're pretty positive on an equity look. And a role for that equity in our strategy. Why we do it? But we wouldn't expect that 9% to change materially. Our debt checks, as we know earlier, are likely to grow as the balance sheet grows. The equity checks in these small or minimum or companies you don't typically invest three to five million is more going to be in the one to three million dollar range.

Speaker Change #136: Hole and generate upside that's got a new one so we're pretty positive on the equity bucket.

Speaker Change #137: And to your question a role for that equity in our strategy and why we do it.

Speaker Change #138: We wouldn't expect that 9% to change materially is like we are that checks as we noted earlier are likely to grow as the balance sheet grows the equity checks in these small lower minimum or companies you don't typically in that.

Speaker Change #139: $3 million to $5 million is more going to be in the $1 million to $3 million range. So the debt's, probably going be a higher percentage of the capital stack per company and what ends up happening is as the 9% maybe it goes to 10% when it goes to 8% that's a function of.

Bowen Deel: So the debt's probably going to be a higher percentage of the capital stack per company. And what ends up happening is the 9% maybe goes to 10%; maybe goes to 8%. That's a function of what exits are happening too. So it's designed to be around 10%. If we went to 20% in our view, that's too much equity in the portfolio. You start having earnings issues, right? And so he's right. So, as we're doing new equity deals, we're also exiting some of these old equity deals. And so it stays around that kind of 10% world, but you're spinning off gains as you go, as it turns, if that makes sense.

Speaker Change #139: What exits are happening too so like.

Speaker Change #139: No.

Speaker Change #140: It's designed to be around 10%, if we went to 20% and argue that's too much equity in the portfolio and you start having earnings earnings issues right and so he's right. So as we're doing new equity deals. We're also exiting some of these old equity deals and so it stays around that.

Speaker Change #141: 10% World, but you are spinning off gains as you as you go as it churns if that makes sense.

Speaker Change #141: Right.

Speaker Change #141: Yeah.

Michael Sarner: Question of page 20 is what do that? Do these gains include all the equity that were sold with these? In every case, that's why you're getting realized gains? There's going to be some clue there for you. These are just, yeah, this is the IOID for the OID. These fees and interest income. Well, by the way, a realized gain would be include the OID. If there was, yeah. So the real, oh, yeah. So what realized gain on a debt check is whatever portion of OID has not been fully accreted. So we accreted over four years. So if you exit, if it's a 2% fee, after two years, if we haven't, you know, the only half of it's been accreted, the rest comes into realized gains.

Speaker Change #141: Okay.

Speaker Change #141: The equity.

Speaker Change #141: Okay.

Speaker Change #141: Alright.

Speaker Change #141: Just quickly.

Okay understood.

Speaker Change #141: These are just yet so this is the IRR.

Speaker Change #141: The fees and interest income.

About a variety of realized gain would be included.

Speaker Change #141: Was yes.

Speaker Change #142: Yeah, so realized gain on a debt check is whatever portion of OID has not been fully accreted. So we accreted over four years. So if you exit is it's a 2% fee. After two years, if we haven't.

Speaker Change #142: The only half of it's been accreted the rest comes into realized gains.

Speaker Change #142: Yes.

Speaker Change #142: Correct, we would label, we would label and equity on our one of our earnings deck.

Michael Sarner: So this doesn't include any equity sales? Correct. We would label, we would label an equity on our, one of our earnings dexons for that. Is there any equity sales that any of these companies don't want to pay off of that? Not in that quarter, no. And we didn't own equity in a lot of these companies either. Did not. And you'll see a lot of these; majority of these companies are pretty large companies. So there are some of the, you know, prior syndicated deals or large businesses. Until you look back on another slide, you'll see our average EBITDA on the portfolios came down a little bit.

Speaker Change #142: Many of these companies.

Speaker Change #142: Not in that quarter now.

Speaker Change #142: And we didn't own equity in a lot of these companies either.

Speaker Change #142: Did not.

Speaker Change #142: And you'll see a lot of these.

Speaker Change #142: Majority of the companies are pretty large companies. So there are some of the <unk>.

Prior syndicated deals or large businesses until you'll look back on another slide youll see our average EBITDA in the portfolios came down a little bit and that's because our exits were large EBITDA businesses. So.

Michael Sarner: And that's because our exits were large EBITDA businesses. But the one like productive group, the first one, that one we actually have a large embedded unrealized appreciation. We got refinance out of the debt, but we'll continue to hold that stub equity in that. We expect a sizeable gain when that thing hits. Yeah, we've got a gain now; we expect that to grow. So that's a good. That's a good one. That's a good example of one where we get refinance out, and we keep... Diacquity, and that PE firm will absolutely sell that business probably in their 18, 24 months I guess.

Speaker Change #143: But the one like productive gripped the first one that one we actually have a large embedded unrealized depreciation we got refinanced out of the debt, but we will continue to hold that stub equity in net.

Speaker Change #144: Expect a sizable gain when that thing is we've got a gain now we expect that to grow. So that's a good that's a good one it's a good example of one where we get refinanced out and keep the equity.

Speaker Change #145: And that P firm will absolutely sell that business probably next.

Speaker Change #145: 24 months I guess.

Speaker Change #146: Alright, Red light is blinking thats the hook. Thanks for your time guys. Thank you all.

Operator: All right, red light blinking: that's the hook. Thanks a lot. Thank you all.

Speaker Change #146: Okay.